When I began my career in financial services in 2011, the vast majority of the investing public was still recovering from aftershock of the great recession that had only ended a few years prior. Rampant were fears of a double dip recession – the idea that the market correction of 2008 could rear its ugly head again – or that perhaps, something much bigger was on the horizon.
Out of these fears comes the desire for safety. And despite the peace of mind they provided, with interest rates continuing to plummet, FDIC insured bank accounts and certificates weren’t providing the yield many retirees needed to maintain their lifestyles. Where else was there to look for safety and yield?
Enter gold, one of the rarest metals on the planet. While the stock markets were moving sideways and doing nothing, the price of gold per ounce was soring. By the end of August 2011, gold was trading at more than $1,800 per ounce – an all-time high.
As you can see from the chart above, reality eventually reared its head. No markets move in one direction, and gold is no exception. Still, the idea that gold is a safe investment got me thinking: just why is it perceived as a safe investment in the first place? To answer that, let’s look to its origins as a source of wealth. From Investopedia:
For 5,000 years, gold’s combination of luster, malleability, density and scarcity has captivated humankind like no other metal. According to Peter Bernstein’s book The Power of Gold: The History of Obsession, gold is so dense that one ton of it can be packed into a cubic foot.
So there you have it – gold is dense, malleable, shiny, and scarce. People like shiny things; they like metal they can use, and they like stuff that packs a big punch without taking up a lot of space. But it turns out it’s really the scarcity aspect that gives the gold any value at all.
From 1871 to 1914, the gold standard was at its pinnacle. During this period near-ideal political conditions existed in the world. Governments worked very well together to make the system work, but this all changed forever with the outbreak of the Great War in 1914.
With World War I, political alliances changed, international indebtedness increased and government finances deteriorated. While the gold standard was not suspended, it was in limbo during the war, demonstrating its inability to hold through both good and bad times. This created a lack of confidence in the gold standard that only exacerbated economic difficulties. It became increasingly apparent that the world needed something more flexible on which to base its global economy.
That something flexible: paper currency. What’s more is that gold, historically speaking, hasn’t always been the standard for determing monetary value. From Investopedia:
While gold has fascinated humankind for 5,000 years, it hasn’t always been the basis of the monetary system. A true international gold standard existed for less than 50 years (1871 to 1914) in a time of world peace and prosperity that coincided with a dramatic increase in the supply of gold. The gold standard was the symptom and not the cause of this peace and prosperity. Though a lesser form of the gold standard continued until 1971, its death had started centuries before with the introduction of paper money – a more flexible instrument for our complex financial world.
Gold is scarce. But just how scarce?
The reason that gold is so rare on earth is because it’s rare in the universe. In fact, relative to human life, the event that creates gold is rare occurrence: the collision of two neutron stars, which happens about once every 100,000 years. When those collisions do happen, the amount of gold produced – not to mention silver and platinum – might make you feel small. Take the first ever direct observance of such a collision in October of 2017.
Observations revealed the event forged roughly 50 Earth masses’ worth of silver, 100 Earth masses of gold, and 500 Earth masses of platinum.
How much gold is that?
The gold forged alone is worth about 100 octillion dollars at (October 2017’s) market price, according to Metzger, or $100,000,000,000,000,000,000,000,000,000 written out (1 followed by 29 zeroes).
Is it abundant or is it in short supply? Whether we’re talking gold, time, love, happiness, wealth, or anything else, it’s a matter of perspective. If your perspective on gold has changed by this point, imagine how your perspective on the wealth you’re trying to build can change with the right mindset.